May 19, 2023
CA – Trade Association Asks US Supreme Court To Review Case That Involves Online Remote Sellers
The Online Merchants Guild has petitioned the US Supreme Court for a writ of certiorari, asserting it may pursue a contest in federal court against California’s attempt to collect sales tax from Guild members. The members being represented by Guild had inventory held in a nonaffiliated marketplace facilitator’s in-state warehouse.
The petition asserts:
- The federal Tax Injunction Act (TIA) should not apply differently to taxpayers or third parties; and,
- Plaintiffs who cannot challenge tax information demands in state court do not have an acceptable remedy.
In the case, the trade association argued that California’s attempts to collect sales tax from its online remote seller members on their sales to in-state residents prior to October 2019 violated Guild members’ rights under the US Constitution and the Internet Tax Freedom Act, given that their limited contacts with California.
For additional information, see: Merchants Guild v. Nicolas Maduros, Director, California Department of Tax and Fee Administration.
If you have questions about whether your business is required to collect and remit sales tax, please reach out to a member of the Withum SALT Team.
April 21, 2023
Los Angeles Delays Spending Mansion Tax Collections in Response to Legal Challenges
Los Angeles Mayor Bass released her 2023-2024 budget, which reserves the funds collected from Proposition ULA’s recently enacted “Mansion Tax”. Prop. ULA’s tax collections have been reserved in the event the tax is invalidated pursuant to the various legal challenges filed in response to the tax’s enactment.In the event the tax is invalidated, the City will have funds on hand to issue refunds.
Pursuant to County Prop. ULA, effective April 1, 2023, LA County imposes a 4% documentary stamp tax on the sale of residential real estate with a gross sales price between $5 million and $10 million, and a 5.5% documentary stamp tax is imposed on transactions greater than $10 million. As such, effective April 1, 2023, the sale of a home in LA County for $20 million would incur a documentary stamp tax of $1.1 million in addition to other real estate transfer taxes and recording fees. Taxes raised pursuant to Prop. ULA are dedicated to reducing homelessness in the County.
Various taxpayers have challenged the validity of the tax claiming California.One challenge asserts that the California Constitution prohibits localities from imposing documentary stamp taxes for special purposes. A second challenge asserts that the tax violates the equal protection clauses of the California and US Constitutions.While the various challenges were filed prior to the tax’s effective date, no court has issued an injunction prohibiting LA County from collecting the tax.However, if the tax is subsequently invalidated pursuant to any of the various legal challenges, the County would be obligated to issue refunds.
Furthermore, “The Taxpayer Protection and Government Accountability” Proposition has gathered enough signatures to be placed on the statewide November 2024 ballot. This statewide proposition would require any proposition imposing (or raising) a tax to be approved by 2/3 of the voters and would invalidate any tax proposition adopted after January 1, 2022, that was not approved by 2/3 of the voters.Proposition ULA received 58% approval, and thus would be invalidated if the statewide proposition passes.
March 17, 2023
California Releases Tax Guide for Cannabis Businesses
On March 1, 2023, the California Department of Tax and Fee Administration (CDTFA) issued an updated sales, use, and excise tax guide for cannabis businesses. The guide applies to cannabis retailers as well as microbusinesses that make retail sales of cannabis and cannabis products. Excise tax is due for retail sales of cannabis and cannabis products made on or after January 1, 2023. The first cannabis excise tax return and the associated payment is due on May 1, 2023. Cannabis retailers are required to register for with the CDTFA for a seller’s permit and a cannabis retailer excise tax permit. The CDTFA Tax Guide for Cannabis Businesses outlines the registration, tax collection, and filing obligations for cannabis retailers.
If you have questions about state excise and sales taxes on cannabis products, please reach out to a member of the Withum SALT Team.
March 10, 2023
California Provides Tax Extensions for Taxpayers Affected by Winter Storms
Governor Newsom announced on March 2, 2023, that individuals and businesses impacted by recent winter storms may qualify for an extension until October 15, 2023 to file and make certain payments as follows:
- Individuals whose tax returns and payments are due on April 18, 2023.
- Quarterly estimated tax payments due January 17, 2023, April 18, 2023, June 15, 2023, and September 15, 2023.
- Business entities whose tax returns are normally due on March 15 and April 18.
- PTE Elective Tax payments due on June 15, 2023.
Residents and businesses in Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, Yolo, and Yuba counties who have been affected by severe winter storms, flooding, landslides, and mudslides are eligible for tax relief.
California’s announcement aligns its due dates with Federal relief extended to California taxpayers as updated on February 24, 2023. If you have questions about whether you are entitled to Winter Storm Relief provisions, please reach out to a member of the Withum SALT Team.
February 10, 2023
California Issues Guidance on the Capital Account Reporting Requirements
On January 30, 2023, the California Franchise Tax Board issued FTB NOTICE-2023-01, explaining the “Analysis of partner’s tax basis capital account” reporting requirements for the California Schedule K-1 on Forms 565 and 568.
For tax years 2021 and 2022, taxpayers filing Forms 565 or 568 are allowed to use the tax basis method as determined under federal law (as stated on the Federal Schedule K-1), or use of the tax basis method established under California law.
Starting in tax year 2023 (and applicable for all subsequent tax years), taxpayers filing Forms 565 or 568 will be required to report the partners’ or members’ capital accounts under the tax basis method defined under California law.
If you have questions about your business’ state tax compliance obligations, please reach out to a member of the Withum SALT Team.
January 20, 2023
California Commences Foster Youth Tax Credit
For taxable years beginning on or after January 1, 2022, the new refundable Foster Youth Tax Credit, provides up to $1,083 credit per eligible individual or up to $2,166 credit for taxpayers filing joint returns. To qualify for this credit, current and/or former foster youth must:
- Qualify for the California Earned Income Tax Credit
- Be between the ages of 18 and 25 at the end of the tax year
- In California foster care at age 13 or older and placed with foster parents through the California foster care system
- Provide verification of their foster care status
In order to claim the credit, Form FTB 3514 must included with the California personal income tax return.
January 13, 2023
CDTFA Announces Sales and Excise Tax Relief for Counties Affected by Winter Storms
The California Department of Tax and Fee Administration (“CDTFA”) declared statewide excise and sales and use tax relief for taxpayers affected by this. The relief provisions include an extension of up to three months to file required tax returns and pay the tax as well as penalty and interest abatement for affected taxpayers.
Qualified taxpayers can apply for the tax relief through the CDTFA website. More information can be found on the CDTFA website.
If you have questions about whether your business is eligible for the CDTFA’s California winter storm tax relief, please contact a member of the Withum SALT Team.
January 13, 2023
IRS Announces Tax Relief for California Taxpayers Affected by Winter Storms
The IRS announced comprehensive tax relief provisions for taxpayers affected by California’s winter storms. These relief provisions provide for a May 15, 2023 extended due date for disaster affected taxpayers to file returns.This includes:
- Personal income tax returns originally due April 18, 2023;
- Business tax returns due March 15, 2023;
- Payroll tax returns due January 31, and April 30, 2023.
For more information about the IRS’ relief provisions for California taxpayers affected by this winter’s storms, please see IRS CA-2023-02 and IRS Alert IR-2023-03.
If you have questions about whether your business is eligible for the IRS’ California winter storm tax relief, please contact a member of the Withum SALT Team.
January 6, 2023
California New Updated Related Excise and Sale on Cannabis Inspection
On January 1, 2023, The California Department of Tax and Fee Administration (CDTFA) released information on its excise, sales, and use tax Cannabis Inspection Program. The announcement provides comprehensive guidance for taxpayers engaged in cannabis businesses, including taxpayer’s rights, CDFTA’s routine inspection details, and required tax reporting.
For more information regarding California’s Cannabis taxes, please refer to Publication 552. If you have questions about whether your business is required to collect and remit sales tax, please reach out to a member of the Withum SALT Team.
November 11, 2022
Californians Reject Imposing Additional Taxes on Millionaires
By a nearly 20% margin, Californians rejected Proposition 30 imposing an additional 1.75% tax on individuals making more than $2 million per year. If Proposition 30 had passed, the tax rate on individuals making more than $2 million would have increased from 13.3% to 15.05%. California Proposition 30 was rejected by voters 59.06% to 40.94%.
October 14, 2022
California Enacts Wildfire Settlement and Extends Paid Supplemental Sick Leave Bills
Effective September 29, 2022, settlement claims received by wildfire victims from the 2015 Butte Fire, 2017 North Bay and Thomas Fires, and 2018 Woolsey and Camp Fires are excluded from California taxable income. Taxpayers who qualify for this exclusion include those that owned, resided in, or had a place of business in one of the affected counties, incurred expenses, and received settlements related to the fires. The taxpayer must provide supporting documentation to the California Franchise Tax Board, if requested.
Also enacted, employers with more than 25 employees must continue to provide up to 80 hours of COVID-19 supplemental sick pay to all employees. This mandate was initially set to expire September 30, 2022, but now has been extended to December 31, 2022. Qualified businesses can receive up to $50,000 in Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Grants to reimburse them for the cost of the supplemental paid sick leave incurred by employees. If you have questions about how these California changes affect your business, please contact a member of the Withum SALT Team.
October 14, 2022
California’s New Tax Basis Reporting Poses Challenges for Partnerships
The California Franchise Tax Board (FTB) in early 2022 released its 2021 tax forms and instructions for partnerships, Form 565, and limited liability companies (LLC), Form 568. Taxpayers learned that the FTB would be requiring them to report tax basis capital amounts on a California basis rather than the federal tax basis amounts.
The FTB recognized the difficulty this may present for taxpayers and released Notice 2022-01 on March 8, 2022, which allowed taxpayers to report the capital accounts on either a federal or California basis for the 2021 tax year. However, the California tax basis method must be used for the 2022 tax year. California is the first state to mandate a tax basis on the state level.
September 9, 2022
California Bill to “Fix” Pass-through Entity Elective Tax Credit and the Other State Tax Credit Interplay
On Thursday, September 1, 2022, SB-851 was sent to Governor Newsom. The bill addresses the pass-through entity elective tax credit and the other state tax credit for post-2021 tax years. The current California Franchise Tax Board guidelines states that a taxpayer must first reduce their California tax liability by the amount of pass-through entity elective tax credit claimed, thus reducing the credit for taxes paid to other states. SB-851 will allow California resident taxpayers to addback the pass-through entity elective tax credit when computing their California credit for taxes paid to other states.
August 29, 2022
California Legislature Passes Unclaimed Property Voluntary Compliance Program
On August 17, 2022, the California legislature passed Assembly Bill 2280 which now allows the Controller to establish a program for the voluntary compliance of eligible holders of unclaimed property. Holders that have not reported unclaimed property reports may request to enroll in the program which waives the 12% interest assessed against the holder for non-reporting. In order for the holder to qualify for the interest waiver they must:
- Enroll and participate in an unclaimed property educational training program provided by the Controller within three months after the date on which the Controller notified the holder of their enrollment in the program;
- Review their books and records for unclaimed property for at least the previous 10 years, starting from June 30 or the fiscal year-end preceding the date on which the report required is due;
- Make reasonable efforts to notify owners of reportable property by mail or electronically no less than 30 days prior to submitting the report;
- Report to the Controller within six months after the date on which the Controller notified the holder of their enrollment in the program. Upon written request by the enrolled holder, the Controller may postpone the reporting date for a period not to exceed 18 months after the date on which the Controller notified the holder of their enrollment in the program; and
- Submit to the Controller an updated report and pay or deliver to the Controller all escheated property specified in the report no sooner than seven months and no later than seven months and 15 days after the Controller received the report submitted.
A holder is ineligible for the voluntary compliance program if:
- The holder is the subject of an examination of records or has received notification from the Controller of an impending examination;
- The holder is the subject of a civil or criminal prosecution involving compliance with unclaimed property;
- The Controller has notified the holder of an interest assessment within the previous five years, and the interest assessment remains unpaid at the time of the holder’s request to enroll; and
- The Controller has waived interest assessed against the holder under this section within the previous five years.
Assembly Bill 2280 will be sent to Governor Gavin Newsom for his consideration.
August 29, 2022
California Statewide Disaster Relief Due to Monkeypox
The California Employment Development Department (EDD) has announced that employers statewide directly affected by the monkeypox outbreak may request up to a two-month extension of time to file their state payroll reports and/or deposit payroll taxes without penalty or interest. In order to qualify for the extension, employers must file a written request with the California EDD within two months from the original delinquent date of the payment or return. Section 1111.5 of the California Unemployment Insurance Code allows for this extension to be granted by the California EDD.
August 19, 2022
Growing Problem of ‘Wayfair Creep’ Threatens Compliance Burdens
The Wayfair case is starting to encroach itself on income tax for e-retailers. The majority of states have adopted economic nexus principles for income tax. Some of these economic nexus rules have bright line thresholds on the amount of sales derived from sources in the state (i.e., “factor presence”). Other states use a more amorphous “doing business” nexus standard where theoretically $1 worth of sales into the state would be sufficient to create nexus.
While many states have lowered their nexus threshold to merely deriving receipts from sources within the state, P.L. 86-272, protected many retailers from state income taxes. However, In July 2020, the Multistate Tax Commission issued its restatement on when P.L. 86-272 applies in the digital economy. As per the MTC’s restatement, a number of activities that would have previously been considered protected may now break P.L. 86-272 protection. Examples of digital activities that may break P.L. 86-272 protection include providing customer support via online chat tools, extended warranty plans, advertising job openings, accepting job applications through the Company website, putting specific types of cookies into customer’s devices, and providing remote repairs and automatic device updates. California and New York have already indicated that they are adopting the MTC’s restatement, and other states are sure to follow. This will substantially curtail retailers’ ability to claim P.L. 86-272 protection.
For questions about whether your business may be protected under P.L. 86-272, please contact the Withum SALT Team.
August 12, 2022
California FTB Issues Erroneous Refunds
The FTB has acknowledged that due to systemwide issues with the 2022 Form 3893, Passthrough Entity Elective Tax Payment Voucher, June 2022 passthrough entity elective tax prepayments were incorrectly applied to the 2021 tax year resulting in erroneous refunds of these payments. This issue affects the passthrough elective tax election for 2022 as the requirement for taxpayers to have a valid election must remit payment of the lesser of $1,000 or 50% of the 2021 passthrough entity elective tax due by June 15, 2022. The FTB is allowing taxpayers to return these erroneous refunds to preserve their right to make the election.
Although the FTB has not indicated a specific deadline to return these refunds, we recommend that taxpayers who received a refund from the FTB contact Withum as soon as possible and receive advice for the next steps to avoid problems making 2022 passthrough entity tax elections. The method for returning a payment depends on how the payment was refunded and whether or not the check has been cashed. Taxpayers are advised to not cash checks from the FTB related to PTET refunds.
July 29, 2022
California Issues Information on Paycheck Protection Program Loan Forgiveness
On July 20th, the California Tax Board released information on the Paycheck Protection Program (PPP) loan forgiveness for corporate income and individual income tax purposes, as well as Restaurant Revitalization Fund (RRF), and Shuttered Venue Operator (SVO) grant income exclusions. Some information provided includes:
- For tax years beginning on or after January 1, 2019, Shuttered Venue Operator (SVO) grants may be excluded from income;
- For tax years beginning on or after January 1, 2020, Restaurant Revitalization Fund (RRF) grants may be excluded from income;
- Qualifying taxpayers for SVO and RRF grants are able to take a deduction allowance of expenses, basis adjustments, and tax attribution for the grants;
- Loan amounts forgiven under the Paycheck Protection Program Extension Act of 2021 are allowed to be excluded from income; and
- Forgiven PPP loans, SVO grants, and RRF grants can be excluded from gross income.
July 22, 2022
California Gasoline Tax Refund Rate for July 1, 2022, to June 30, 2023
The California Controller has announced an increase in the refund rate for all gasoline purchased from July 1, 2022, through June 30, 2023. The refund rate for all gas increased to $0.539 per gallon from $0.511 per gallon. This refund opportunity is for claimants who purchase gasoline in the State of California for off-highway, paratransit, export, or blended fuel (E-85) purposes. The Gasoline Tax Refund Claim form is Form SCGR-1. The State Controller’s Office is accepting electronic submissions of Gasoline Tax Refund claims via email to the following email address [email protected]. In addition, the revised form allows for either an original or electronic signature. The Form SCGR-1 and all related schedules must be completed and submitted to the State Controller’s Office within three years from the gasoline purchase date.
July 8, 2022
California’s Cannabis Businesses Eligible for Income Tax Credits
On June 30, 2022, California will provide income tax credits for cannabis businesses. For tax years beginning January 1, 2023 through and before January 1, 2028, qualified licensed commercial cannabis businesses may receive a credit equal to 25% of the total amount of qualified expenditures in the taxable year, capped at $250,000.
In order to claim the credit:
- The business must provide full-time employees with certain benefits;
- Qualified expenditures means the amount paid or incurred by the business for employment compensation for full-time employees; safety-related equipment, training, and services; or workforce development and safety training for employees; and
- The business must request a credit reservation from the California Franchise Tax Board during the month of July for each taxable year.
May 13, 2022
Los Angeles Ballot Initiative To Increase Real Estate Transfer Tax on Homes Costing Over $5 Million
United to House LA submitted documents to show they have collected 98,171 signatures for a ballot proposal to increase the real estate transfer tax on homes selling for more than $5 million. The proposal estimates it would generate $8 billion over 10 years and these funds would be dedicated to expanding and maintaining the availability of affordable housing in the LA area. The current real estate transfer tax rate on residential real estate is currently 0.45%. Pursuant to the ballot initiative, the real estate transfer tax would increase to 4% for real estate selling for more than $5 million and less than $10 million and the rate would increase to 5.5% tax on property selling for more than $10 million.
California and New York Release Revised Regulations on P.L. 86-272
The California Franchise Tax Board and the New York Department of Taxation have issued a technical memorandum and a draft regulation respectively. The documents put out by the states revise their interpretation of P.L. 86-272.P.L. 86-272 prohibits states and localities from imposing income taxes on remote businesses if their only activity with the state is soliciting sales of tangible personal property. The Multistate Tax Commission recently reinterpreted P.L. 86-272, stating that businesses interacting with customers via a website or an app are engaging in unprotected business activities within the customer’s state in a variety of scenarios, and thus no longer qualify for P.L. 86-272 protection. Both California and New York are using this reinterpretation of P.L. 86-272 to modify their respective stances on when businesses can claim P.L. 86-272 protection. Furthermore, California has indicated that its revised interpretation of P.L. 86-272 can be applied retroactively. New York is also considering a retroactive application of its revised interpretation of P.L. 86-272. For more information, please see California’s Technical Memorandum, and New York’s Draft Regulation. If you have questions about whether your business may still be protected under P.L. 86-272, please contact a member of the Withum SALT Team.
March 25, 2022
California Earned Income Tax Credit Qualification Expanded
Pursuant to P.L. 117-2, the Federal American Rescue Plan Act of 2021 broadens the EITC requirements for 2021 and future years to include married/registered domestic partner (RDP) not filing a joint return under certain circumstances. Specifically, the law provides the following:
“A Spouse/RDP can claim the CalEITC if married, not filing a joint return for the taxable year, had a qualifying child who lived with the spouse/RDP for more than half of the tax year, andeitherof the following apply:
- The spouse/RDP lived apart from their spouse for the last 6 months of the year
- The spouse/RDP is legally separated according to state law under a written separation agreement or a decree of separate maintenance and did not live in the same household at the end of the year.”
If a person is married or registered domestic partners filing separately and have already filed their return but did not take the California Earned Income Tax Credit, they can file a superseded return prior to April 18, 2022, wait for a letter from FTB for instructions, or file an amended return.
Furthermore, a spouse/RDP that meets the above requirements may also qualify for the Young Child Tax Credit if the qualifying child was under the age of six at the close of the taxable year.
March 11, 2022
California Issues Fact Patterns Protected Under P.L. 86-272 Conducted Via Internet
On February 14, 2022, California released Technical Advice Memorandum 2022-01, that provides guidance and examples of activities protected under P.L. 86-272. The TAM takes into account how the economy has changed since P.L. 86-272 was enacted due to technological advancements.
The Franchise Tax Board indicated businesses operations similar to the following fact patterns are not protected under P.L. 86-272:
- The taxpayer has an employee who telecommutes on a regular basis from within California performing business management and accounting tasks.
- The taxpayer regularly provides post-sale assistance to California customers via either electronic chat or email that their customers initiate by clicking on an icon on the business’ website. For example, the business regularly advises customers on how to use the products after delivery.
- The taxpayer solicits and receives on-line applications for its branded credit card via the business’ website from California customers. The issued cards will generate interest income and fees for the business.
- The taxpayer remotely fixes and/or upgrade products previously purchased by California customers by transmitting code or other electronic instructions to whose products via the Internet.
- The taxpayer offers and sells extended warranty plans via its website to California customers who purchase the business’ products.
Additional fact patterns can be found in the TAM 2022-01 here: https://www.ftb.ca.gov/tax-pros/law/technical-advice-memorandums/2022-01.pdf.
February 11, 2022
California Pass-Through Entity (“PTE”) Tax Update
On February 9, 2022, California’s Governor Newsom signed Senate Bill 113 providing the much-anticipated legislative fix for businesses electing the Pass-Through Entity (“PTE”) tax. Previously, under A.B. 50, PTE credit passed through to qualified taxpayers could not reduce the net income tax below the tentative minimum tax (“TMT”). Retroactive for tax years beginning on or after January 1, 2021, S.B. 113 provides technical corrections allowing for the PTE credit to reduce net income tax below TMT. Additionally, the legislation:
- Expands the definition of qualified taxpayer to include single member limited liability companies (“SMLLCs”) owned by individuals, estates, or trusts to consent and for their owners to receive a PTE tax credit.
- Expands the definition of qualified entity to included entities that have partnerships as partners. However, partnerships are not qualified taxpayers, which means their income is not included in the pass-through entity tax base.
- Includes guaranteed payments to consenting qualified taxpayers in the tax base for purposes of computing the PTE tax.
- Effective for the tax years beginning on or after January 1, 2022, allows for other state tax credits to be used before the PTE tax credit.
Further, for tax years beginning on or after January 1, 2022, the bill ends the temporary suspension of net operating losses (“NOLs”) and eliminates the $5 million business credit limit previously enacted under California A.B. 85.
For taxable years beginning on or after January 1, 2019, S.B. 113, in modified conformity with the American Rescue Plan Act, excludes from gross income any amount received in the form of a federal restaurant revitalization grant and adopts, with exceptions, prohibiting any reduction in tax deductions, reductions in tax attributes, and denials of basis adjustments based on the exclusion from gross income.
For businesses considering making a PTE tax election, in many states PTE elections are yielding significant tax benefits. PTE election decision making requires modeling and analysis of the specific facts and circumstances to weigh the potential benefits along with the risks in determining the right course of action.
February 4, 2022
California Franchise Tax Board to Share Unclaimed Property Information with State Controller
Per Assembly Bill 466, the California Franchise Tax Board (“FTB”) is now authorized to share unclaimed property information with the State Controller’s Office. Previously, the Franchise Tax Board was prohibited from sharing taxpayer information with the State Controller’s office.
Pursuant to AB 466, the FTB has added questions to the 2021 business tax returns. These questions include whether the business has previously filed an unclaimed property report with the Controller’s Office, the date the report was filed, and the amount of unclaimed property remitted.
Currently, the Controller’s Office may only use the information obtained from the FTB to educate taxpayers that are not in compliance with escheat laws. However, taxpayers should consider the aggressiveness of California Franchise Tax Board and should be aware of the increased risk of a possible audit.
November 10, 2021
California Increases Fee Collection Requirements for Marketplace Facilitators
California legislation AB-1402 extends the registration and filing requirements related to marketplace facilitators that goes beyond the Department’s existing laws requiring marketplace facilitators to register, collect, and remit sales and use taxes with the department. Effective January 1, 2022, marketplace facilitators are required to register, collect, and remit lead-acid battery recycling fees, lumber products assessment, electronic waste recycling fee, and tire fees with the California Department of Tax and Fee Administration. Excluded from this requirement are local prepaid mobile telephony surcharges.
California Provides Financial Relief to Small Businesses
Starting November 1, 2021, small business employers can apply for the 2021 Main Street Small Business Tax Credit to obtain financial relief due to COVID-19. Small businesses can utilize this credit to offset their income or sales and use taxes when they file their returns. The California Department of Tax and Fee Administration (“CDTFA”) will accept online applications through November 30, 2021.
A small business may qualify for the credit if it:
- Employed less than 500 employees as of December 31, 2020;
- Had a net increase in qualified employees; and,
- Had a 20 percent or greater reduction in gross receipts reported for income taxes between the 2019 and 2020 tax years.
Small businesses may receive up to $1,000 per additional net qualifying employee, not to exceed $150,000. [See https://www.cdtfa.ca.gov/industry/main-street-small-business-tax-credit-II-AB150.htm]
November 4, 2021
California – Unitary Business Determinations for Holding Company Situations
The California Franchise Tax Board (“FTB”) issued a letter ruling setting out the FTB’s position on when a pass-through holding company is unitary with other pass-through entities in a number of different scenarios. Unlike the analysis for incorporated entities, the FTB’s unitary analysis for pass-through entities requires examining additional, non-traditional factors. Furthermore, when the holding company does not have any operations of its own, the weighting of the non-traditional factors in the analysis is enhanced. The second consideration is if the business structure creates unity. For example, if a holding company functions as a focal point or conduit for operating the business, then the affiliated entities will be considered unitary. In contrast, if the holding company was clearly formed for investment purposes, then there is no unity. The third scenario is if the holding company is associated with one operating business, then the holding company is not unitary with its parent or the operating company. Finally, unlike corporate holding companies, pass-through holding companies may not need to own a controlling interest in the operating company in order to be considered unitary with the operating company. Even when a pass-through holding company owns less than 50% of the operating entity, the FTB will still examine whether there are indications of a unitary relationship in making its determination.
September 23, 2021
California Releases Guidance on its Newly Enacted Pass-Through Entity Tax (PTE)
The California Franchise Tax Board (FTB) issued guidance about the newly enacted elective pass-through entity tax (PTE) effective January 1, 2021, to January 1, 2026. [see A.B. 150(2021)] The FTB discusses how certain qualifying PTEs may annually elect to pay this entity-level state tax on income. In return, qualifying taxpayers receive credit for their share of the entity level, ultimately reducing their California personal income tax.
A “qualified taxpayer” can be individuals, fiduciaries, estates, or trusts subject to California personal income tax and must be a partner, member, or shareholder of a qualified electing entity. Note that a taxpayer must approve of having their pro-rate share of the qualified income of the electing qualified PTE.
A qualified taxpayer can make an annual election on a timely filed tax return. However, once the election is made, it is irrevocable for that year and is binding on all PTE partners, shareholders, and members.
For the 2021 tax year, the election must be made when the tax return is filed. Beginning January 1, 2022, and before January 1, 2025, the qualifying taxpayer must make the election when the tax return for the taxable year is filed and remit payment by June 15th. Otherwise, the qualifying taxpayer cannot make the PTE election.
The elective tax must be paid by the due date of the original tax return. However, for the 2022 to 2025 tax years, the first payment of $1,000 or 50% of the elective tax paid in the prior taxable year, whichever is greater, is due by June 15th of the taxable year of the election. The remaining amount must be paid by the due date of the original return without regard to extensions.
Each qualified shareholder’s distributive share of income subject to California personal income tax is subject to tax at 9.3%. Please note that some of California’s personal income tax brackets are lower and some are higher than the PTE rate. As such, some taxpayers may be over-paid and others underpaid as a result of making a PTE election. Please note that overpayments resulting from a PTE election are not refundable – taxpayers who are overpaid as a result of a PTE election may carry forward the unused credit for five (5) years.
September 16, 2021
California Franchise Tax Board Announces Tax Relief for Californians Affected by Wildfires
Due to the California wildfires, the California Franchise Tax Board has extended the deadline to file California 2020 income tax returns, which would have been due between July 14, 2021 through November 15, 2021. The deadline extension to November 15, 2021 is granted to Taxpayers in declared disaster areas. The filings included in this extension are: Individual filers who previously claimed an October 15th extension (strictly for the return filing and not the tax payment, as the tax payments were due on May 17, 2021), business entity filings due between the period of July 14, 2021 through November 15, 2021, and quarterly estimated tax payments due during the extension period.
June 28, 2021
California Provides Small Business Relief Payment Plans for Sales Tax
The CDTFA recently issued guidance for small businesses concerning relief payment plans for sales tax due to Covid-19. Small businesses with annual taxable sales of less than $5 million can obtain a 12-month, interest-free payment plan for up to $50,000 of their sales tax liability. The loan must be paid in full by April 30, 2022, to be eligible for zero interest. The good news is that any business that took advantage of the prior 12-month, interest-free payment plan due July 31, 2021, is eligible to participate in this new 12-month interest-free payment plan. This taxpayer relief is only applicable to sales and uses tax returns due between December 15, 2020, and April 30, 2021. Taxpayers must apply for this payment plan no later than August 16, 2021, through their CDFTA online account.
California Enacts Elective Pass-Through Entity Tax and Several Other Tax Law Changes
Governor Newson recently signed Assembly Bill 150, which allows for an elective pass-through entity tax and amends and broadens the small business hiring credit (aka the Main Street Small Business Tax Credit). The law enacts the Small Business Relief Act, which permits a qualifying entity doing business in the state to annually elect to pay an elective tax based upon its qualified net income computed at the rate of 9.3%. The qualified entity must be doing business in California and is required to file either an S-Corp, Limited Liability Company, or Partnership tax return for taxable years beginning January 1, 2021, through January 1, 2026. A qualified entity is defined as an entity that is taxed as a partnership or S-corporation. The entity’s partners, shareholders, or members in the taxable year of election are exclusively corporations or taxpayers (not partnerships). The entity is not a publicly traded partnership or an entity permitted/required to be part of a combined reporting group. The election is irrevocable and is made on the original, timely filed return for that taxable year.
June 22, 2021
California Enacts SALT Limitation Workaround
California Governor Gavin Newsom has signed a budget trailer bill that creates an elective pass-through entity tax. For taxable years beginning on or after January 1, 2021, and before January 1, 2026, qualified entity doing business in California can make an annual, irrevocable election to pay a pass-through entity tax similar to the New York PTET. The tax is computed at the rate of 9.3% for the taxable year for which the election is made.
Entities eligible to make the California PTET election include entities taxed as partnerships (except publicly traded partnerships) and S Corporations. This elective tax is in addition to, and not in place of, any other tax required to be paid under California’s personal income tax or corporation tax laws. As such, owners of pass-through entities making the election claim a credit for their share of the pass-through entity’s PTE tax on their respective returns. If this results in an overpayment, excess credit may be carried forward for five (5) years.
For taxable years beginning on or after January 1, 2021, and before January 1, 2022, the elective tax is due and payable on or before the due date of the original return that the entity is required to file, without regard to any extension of time for filing the return, for the taxable year of the extension. For future tax years, the Department will establish new due dates for making the election and payment of the tax.
The concept of pass-through entity tax is still fairly new feel free to read Withum’s discussion of the rapid changing landscape of PTET’s.
June 18, 2021
California Issues 45-Day Notice in Relation to Proposed Regulation on Pass-through Entity Withholding
The California Franchise Tax Board (FTB) has issued a 45-day notice of amendments to the draft language of the proposed regulation at California Code of Regulations, Title 18, Section 18662-7,Domestic Pass-Through Entity Withholding(Proposed Regulation), and proposed amendments to the final regulations at Sections 18662-0 through 18662-6 and 18662-8 (Final Regulations)(together, the “Proposed Regulations”). The Proposed Regulations include, among other things, measures to: add language relating to domestic pass-through entity withholding; amend provisions on foreign partner withholding to more closely reflect the federal language; and specify withholding requirements for trusts and estates. The purpose of the notice is to elicit comments on the newly revised Proposed Regulations. Written comments regarding the Proposed Regulations will be accepted until 5:00 p.m. on July 23, 2021. All inquiries and comments regarding the notice should be directed to Leah Thyberg of the FTB whose contact information is set forth in the notice.
California Updates its Golden State Stimulus Webpage
The California Franchise Tax Board (FTB) has updated its Golden State Stimulus webpage. Among other things, the updated webpage refers to the governor’s proposal to add and expand stimulus payments for more Californians and notes that these additional payments are not yet available and are pending legislative action; and expands the discussion of when recipients will receive their payments. Revisions have also been made to the following taxpayer assistance sections: “How to get your payment”; “What to do” for a taxpayer who filed a 2020 return but did not claim a California earned income tax credit for which the taxpayer is eligible; and “Need some help?” For more information, please visit the FTB website on this topic.
June 9, 2021
Update on California’s New Webpage for Assembly Bill 80 and Forgiven Loans
The California Franchise Tax Board (FTB) has replaced the webpage it recently created for Assembly Bill 80 and the tax treatment of forgiven loans with a new webpage. After providing an overview of the bill, the webpage covers three topics: (1) income, (2) expenses, and (3) “What to Do” (i.e., steps taxpayers need to take to amend returns to claim expenses made deductible under A80 that were not previously deducted).
May 26, 2021
California Franchise Tax Board Creates Website on Tax Treatment of Forgiven Loans
The California Franchise Tax Board (“FTB”) has created a webpage to provide guidance on the State tax treatment of forgiven loans. More specifically, the website will address three topics: (1) the exclusion from gross income for loans that are forgiven under California’s conformity to federal provisions such as the Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan (“EIDL”) advance grant amounts; (2) expenses paid for with for PPP loans and EIDL advance grants that were forgiven; and (3) California’s conformity, with modifications, to four federal acts—the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the Paycheck Protection Program and Health Care Enhancement Act, the Paycheck Program Flexibility Act of 2020, and the Consolidated Appropriations Act, 2021—and the date of California’s conformity to each of them.
California Franchise Tax Board to Hold Sixth Interested Parties Meeting Regarding Market-Based Sourcing
The California Franchise Tax Board (FTB) will hold a sixth interested parties meeting (“IPM”) to solicit public input regarding additional proposed amendments to California’s market-based rules regulation (Cal. Code Regs. Title 18 § 25136-2). The sixth IPM will be held telephonically on Friday, June 4, 2021, at 10:00 a.m. To attend, interested parties need to RSVP to the FTB by May 28, 2021, at the email address set forth in the notice. Instructions on how to participate in the sixth IPM are set forth in the notice as well. The proposed amendments to be discussed include: added definitions of asset management services and of professional services; examples to be included in the regulation; addition of a special rule for certain professional services; and a change to the applicability date (to taxable years beginning on or after January 1, 2023).
May 13, 2021
California Rules Taxpayers were Residents on Date of Stock Sale
Taxpayers were residents (and domiciliaries) of California before 2008. On July 18, 2008, Taxpayers sold their shares in a corporation and did not pay California tax on the gain from that sale because they considered themselves nonresidents as of February 26, 2008 (the date on which they rented an apartment in Henderson, Nevada). The California Office of Tax Appeals (OTA)—affirming the Franchise Tax Board’s (FTB’s) proposed assessment of additional taxes against the Taxpayers—determined that even though Taxpayers took some steps to evidence California was not their domicile in renting the Nevada apartment, they did not adopt a new permanent home in doing so (the apartment was part of their plan to find a new permanent home, but was not the actual move to a new residence with the intent to remain there permanently). Further, because the taxpayers were California domiciliaries and physically in the State for a majority of the time leading up to and on July 18, 2008, their 28-day presence in Nevada (date they had moved out of California to the date of the stock sale) did not outweigh the prior California residency/domicile contacts so as to greater a greater connection to another state. Therefore, the Taxpayers were California residents on the date of the stock sale, and owed personal income tax on the gain on the transaction.
May 5, 2021
California Postpones Deadline for Claiming 2016 Tax Refunds to May 17, 2021
The California State Controller and Franchise Tax Board (FTB) announced an extension to May 17, 2021, for individual California taxpayers to claim a refund for tax year 2016. Taxpayers normally have four years to file a claim for a state tax refund in California. Tax year 2016 state income tax returns were due in 2017, so the standard four-year statute of limitations for claiming a refund would have expired on April 15 of this year. With the postponement, individual taxpayers who are due a refund may now file their return for the 2016 tax year no later than May 17, 2021, to claim their money. Similarly, theInternal Revenue Service(IRS) recently announced an extension to May 17 for individual taxpayers who are due a refund on their tax year 2017 federal income tax returns. The IRS normally has a three-year statute of limitations to file a claim for a federal tax refund. Taxpayers claiming a state refund for previous tax years can find Form 540 on FTB’sforms locatorfor the applicable tax year.
California Amends and Adopts Regulations Related to Other Tobacco Products
In November 2016, California voters approved Proposition 56, which included electronic cigarettes in the definition of other tobacco products (“OTPs”). Effective April 6, 2021, California has amended State regulation on wholesale cost of tobacco products (Title 18, Section 4076): which now: defines the terms “electronic cigarettes,” “sold in combination with,” and “tobacco products”; clarifies the scope of manufacturing costs in determining the wholesale cost of tobacco for a manufacturer or an importer that is also a distributor; and provide examples of items that are and are not considered tobacco products. Further, California has also adopted a Regulation on tobacco product manufacturers (Title 18, Section 4077), which among other things: defines the term “tobacco product manufacturer”; provides that a retailer who mixes, blends, or combines a tobacco product that is not in a form suitable for human consumption, such as liquid nicotine, and other ingredients and components to make a product that is suitable for human consumption is a tobacco product manufacturer; and provides that a retailer who is not a licensed manufacturer, importer, or distributor must purchase its tobacco products from a licensed tobacco products distributor or wholesaler. If you sell OTPs in California and have questions about local taxation issues, please reach out to Withum’s State and Local Tax Group.
March 23, 2021
California Update on Extension of Filing Deadline
The California Franchise Tax Board (FTB) has announced that California will extend the state tax filing and payment deadline for 2020 returns for individuals to May 17, 2021. This extension does not apply to estimated tax payments due on April 15, 2021. This relief is available to all individual California taxpayers (including those who file composite returns) without the need for them to file a request with or contact the FTB. The FTB also has created a FAQs regarding the extension, 2020 tax year extension to file and pay (individual) . The California extension is similar to the federal tax filing and payment deadline extension the Internal Revenue Service (IRS) and the Treasury Department announced on March 17, 2021. In IR:2021-59 , they announced that the federal income tax filing and payment due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021, and that this relief does not apply to estimated tax payments that are due on April 15, 2021, which remain due on April 15, 2021. ( News, Filing and Payment Extension for Individuals, California Franchise Tax Board Homepage, 03/17/2021 ; California FTB News Release No. 03/19/2021, 03/19/2021.)
March 17, 2021
California Amending Regs to Clarify How Petitions for Alternative Apportionment are to be Considered by the FTB
The California Franchise Tax Board (“FTB”) voted to proceed with adopting certain proposed amendments to California Code of Regulations, Title 18, section 25137 (Regulation); which permits a taxpayer to petition for the use of an alternative apportionment method, if the standard allocation and apportionment provisions do not fairly reflect the extent of a taxpayer’s business activity in California. There was limited formal guidance as to how such petitions were to be considered by the FTB, so the proposed amendments are aimed at addressing that issue.
May 2, 2020
Conformity to the CARES Act
The California Franchise Tax Board (FTB) provided some preliminary information regarding California’s conformity and nonconformity to the CARES Act. California generally conforms to the pension-related items of the Act, such as early withdrawal penalty and minimum distribution rule changes. However, California does not automatically adapt to the modifications made concerning loans from a qualified retirement account. California does not conform to other changes made by the CARES Act, including those related to loan forgiveness compared to the paycheck protection program. Furthermore, California does not conform to the provisions regarding net operating loss carrybacks, charitable contributions, student loan forgiveness, business interest limitations, and the prior year alternative minimum tax liability for corporations. The FTB will issue further guidance as it completes its analysis of the CARES Act.
March 20, 2020
CA Filings and Deadlines Info
Specific info on type of filing and deadlines can be found on the State of California Franchise Tax Board site here.
CA Franchise Tax Board (“FTB”) Issues Relief Provisions for Taxpayers Amid COVID-19
This relief includes changes to the various tax filing and payment deadlines that occur on March 15, 2020, through June 15, 2020, to July 15, 2020. “This includes:
- Partnerships and LLCs who are taxed as partnerships whose tax returns are due on March 15 now have a 90-day extension to file and pay by June 15.
- Individual filers whose tax returns are due on April 15 now have a 60-day extension to file and pay by June 15.
- Quarterly estimated tax payments due on April 15 now have a 60-day extension to pay by June 15.”
Taxpayers claiming COVID-19 relief should write the name of the state of emergency (for example, COVID-19) in black ink at the top of their tax return to notify FTB of the extension period provided by the relief. If taxpayers are e-filing, they should follow the software instructions to enter disaster information.
In addition, the FTB will also waive interest and any late filing or late payment penalties that would normally apply.
Disclaimer: Please note this is the information that is readily available at this time, it is subject to change so please consult your Withum tax advisor.
Determining If a Taxpayer is Doing Business in California
The economic nexus thresholds for determining if a taxpayer is doing business in California for the 2019 taxable year were released by the California Franchise Tax Board. A taxpayer is considered to be doing business in California if it is organized or commercially domiciled in California; its sales in California exceed a threshold amount or 25% of its total sales; its real property and tangible personal property in California exceed a threshold amount or 25% of its total real property and tangible personal property; or the amount paid in California by the taxpayer for compensation exceeds a threshold amount or 25% of the total compensation paid by the taxpayer. The threshold values for the 2019 tax year are as follows: sales, $601,967; property, $60,197; and compensation, $60,197. (Memorandum on Indexing, Personal Income Tax Law, 2019 Tax Year, California Franchise Tax Board, 08/27/2019.)
April 2, 2020
The City of L.A. is offering emergency micro-loans between $5,000 and $50,000 to small businesses affected by the coronavirus. For micro-loan terms and eligibility, please click here: https://ewddlacity.com/index.php/microloan-program.
April 2, 2020
Small Business Resiliency Fund
Due to the disruptions caused by COVID-19 to the small business community, the COVID-19 Small Business Resiliency Fund was created. It allows impacted small business owners to access up to $10,000 for employee salaries and rent. This program is administered in partnership with Northeast Community Federal Credit Union.
To be eligible for the COVID-19 Small Businesses Resiliency Fund, small businesses must:
- Have at least 1 employee and no more than 5 employees
- Demonstrate a loss of revenue of 25% or more
- Have less than $2,500,000 in gross receipts
- Be engaged in activities that are regulated by the City and County of San Francisco and have a license/permit associated to that regulation
Applications must be completed and submitted via email to [email protected] or they can be mailed or delivered to:
Attn: Judy Lee – COVID 19 Small Business Resiliency Fund
1 Dr. Carlton B. Goodlett PL. Rm# 448
San Francisco, CA 94102
Please review the application for all needed documents to be submitted. In addition, the following will be required:
- Proof of Payroll Costs
- Proof of a 25% or more revenue loss
The State and Local Tax (SALT) laws vary from state to state and are constantly changing. Reach out to Withum’s SALT Team for guidance on how to navigate your state’s local tax laws.